Why do SMs exist?
MM is better alpha (100pct alpha in fact)
PE is better return w/o volatility (tech funds are down in publics but privates haven’t been hit at all)
index funds outperform almost all HFs
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You are grouping “single manager” with a type of strategy or return profile (vs “multi manager”) which is weird. You are probably anchoring to some of the big name single managers, but SM isn’t a strategy, it is more of a decision/management process than any strategy. A portfolio manager can run 100% alpha market neutral and be a “single manager” (in a way renaissance is much more of a SM, while you might want to categorize that as quant, can’t argue against their alpha). The PE comment is just funny, that’s called “accounting magic”.
people can’t even get their money into Citadel anymore at terms which are even close to favorable. Also a lot of the “good” SMs are Tiger Cubs who get their money from proposing that they’re experts on new tech/something else which is difficult to understand. Tiger Cubs are some of the most attractive seats because u have a lot of AUM/IP and are able to just ride long tech. The new age of SMs (Holocene,etc) is just creating a new, smaller pod-like structure which investors can actually get their money into it seems like. After 2022, I think a lot of investors understand the volatility that comes with putting money into Tiger,D1, Coatue, etc
can you expand on the citadel point please? what are the unfavorable terms?
Citadel has great risk-adjusted returns and track record, and so when investors want to put money into Citadel's funds, the prices they pay (in terms of fees) are even higher than 2-20--They do full pass-through costs (meaning no matter how the fund does all the expenses must be paid for by the investors), as well as long-term money lockups (want to say somewhere between 3-5 yrs if not longer plus the second you want to pull your money out they will never take your money again) plus possibly higher incentive fees than 20% as well. The biggest trend in the HF industry right now seems to be go work for and rise the ranks of Citadel/other MM with high fees, and then spin out with the same market neutral model but with more competitive fees because newer fund. Todd Barker at Freestone Grove, Brandon Haley at Holocene, Mike Rockefeller at Woodline, Kodai, Candlestick, and the list goes on. Relating to the main point of the thread, SMs are starting to become less relevant because a lot of them don't really short (see Tiger/Coatue/D1 returns last year--sure they are killing it this year but they hold extraordinary risk as far as SD of returns) and just get long tech which does not command an active management fee. True outpeformance without shorting is incredibly difficult and bringing "a PE style to the public markets" is not a value proposition that capital allocators are looking for because 1) you can't get levered cause you have too much beta 2) your thesis usually takes years to play out (great if it's right but investors don't like waiting--also in that 5yr thesis playout you can basically just sit on your ass?). That being said, there was a post on here about "are we at peak pod?" and I think the question is a really good one. Not really sure where the industry is going, but institutional money management changes every time there is some large market downturn, and it will be interesting to see how it changes after the next one. The only reason this question was written in the first place is likely because of the Tiger Cubs getting their face ripped off in 2022, but when beta is working people like market neutral a lot less.
Index funds outperform HFs prior to leverage. The new wave is just running books with extremely tight risk controls, making sure u don’t lose money and can get in that 3-4% yearly return range, then lever up to juice returns. MMs have the advantage of scale in this pursuit compared to SMs at risk of blowing up
Interesting how you cite the private valuations not being marked as a positive... I personally believe that investment managers in an asset class committing fraud as a negative but hey, no one cares about accounting or fraud anymore so clearly the market agrees with your thought process.
'If I close my eyes I can pretend these are still unicorns.'
Thought it was a troll post with that comment on PE returns, but since there is some comments here I'll throw in.
As the other person said, SM is just an organizational structure, and you really meant why should directional strategies continue to exist, but yes these days everyone just refers to SM vs. MMHF - but its worth pointing out there are SMs that are market neutral.
Well they exist because over the right market environments, +ve net exposure funds (when run well) should ideally generate higher absolute returns than their market neutral/relative value counter parts. Its sort of like asking why should anyone invest their 401k in an index fund without shorting everything as well - well its because you want to generate higher returns and taking some market risk helps to achieve that. Beta isn't inherently bad - I mean we want to compound money at the end of the day here.
In fact there is some debate as to the value that PE can even offer at times - with some comparing it closer to just levered public market equity returns with the volatility obfuscated by limited transparency when it comes to marks, but I'm not gonna go into that debate or take a side here.
My personal belief is that the flood of assets into market neutral strategies might make it harder to perform, and like all things in life these things can be a bit cyclical / market environment dependent, or the only funds capable of delivering will be very scaled because it is required from a resources/talent acquisition stand point. What is not cyclical is that LPs will continue to demand more from the GPs, and the consolidation towards the most scaled and resourced shops will continue. Despite all of that, I also still believe there will continue to be talented investors willing to take a shot at running money with +ve net exposure, as well as LPs willing to give them that money.
I think the crux of OPs argument is that getting long beta (while it is +ev) should not continue to command the 2-20 management fee as these funds have inherently more risk with unproven outperformance of the indexes they are designed to track. The value proposition of risk-adjusted returns from Citadel, Millennium, market-neutral SMs is inherently value-additive. While they still generate the same fees (which is part of what makes the seat so attractive) long-biased tech funds like Tiger are not “hedge funds” in the sense they have no real hedging strategy and essentially track what u might find in the XT or XLK. Nothing against Tiger and like I said it’s an incredible seat, but the funds value proposition to investors should likely not warrant fees competitive with Citadel
To be fair, though, Citadel’s fees are way higher than 2/20
You're an idiot if you actually believe this. Dozens of relatively decent LMM/MM funds are getting crushed right now between interest rates rising and portco growth taking a hit which completely fucks the valuations they underwrote the last 3-4 years. Even some of the big guys like Thoma and Vista are showing some cracks, it's in the rumor mill for those of us in tech that they overpaid for a few huge assets at the top of the cycle and are having genuine problems trying to line up potential buyers at a level that makes sense in the current environment. Sure, private markets take longer to show the cracks of a recession but unlike the gradual slip downward you see in public markets, when shit hits the fan in privates everything goes from fine to suddenly all terrible all at once. There will be a reckoning I assure you.
due to a lower level of transparency in the DD process (-> higher risk higher reward).
volatility in public vs. illiquidity in private
only less than 5% of HF really deserve to exist, so the "almost all" is irrelevant because what matters are those that do it consistently (Citadel, Point72, Renaissance, Eliott, etc.). When the best funds don't take more money investors shift to more mediocre ones that underperform. Thus, HFs that loose vs. an Index are only satisfying an investor's need: allocating capital, and not attracting investors due to their outperformance abilities. So they're irrelevant.
MMs = you pay manager to create diversification / low vol / uncorrelated returns
SM = LP can get direct exposure to an asset class / strategy and create the uncorrelated portfolio themselves
If an LP wants direct exposure to an asset class / strategy, why not just allocate to LOs? The value prop of SMs is still to deliver alpha alongside beta through security selection and some can run highly concentrated. That doesn't appear conducive to piecing together an uncorrelated portfolio from an allocator's perspective.
LPs wanting exposure to an asset class doesn't (imo) necessarily mean LO exposure - never worked with one so not sure, but it's likely that SMs with the flex of going short, can cover "everything" in that sector, i.e., LPs want access to an asset-class, and know their allocation will have coverage. For example in EM, frequently ideas pop up where you need flexibility of SM to make directional bets and harvest alpha that pops up, which doesn't necessarily pass-through to a MM-product to LPs.
Oh boy, this same exact thread again, glad you used the search function /s
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